In the Berkshire Hathaway 2011 letter, Buffett said:
My own preference – and you knew this was coming – is our third category: investment in productive assets, whether businesses, farms, or real estate.
I fail to see how real estate produce periodic profit like farms or business. Isn't real estate's price increase only driven by other people's demand? How does it differ from gold, which he considers as unproductive?
Real estate can be rented out (or otherwise "used"), so it "produces" income. He's not solely investing in real estate in the hopes the value increases, he's saying it's a better investment because it produces income whether or not the value increases.
Gold is a commodity. If I have some gold, my gold is exactly the same as someone else’s gold. I have absolutely no control over the value, and when I go to sell it, my price is completely dependent on what everyone else in the market is doing. I compete with every other seller on price alone; there is no other way to differentiate my product.
For real estate, there are no two parcels alike. For starters, location, which is a huge factor in the value, is different for every piece of land. Real estate can be developed to increase the value, and developments on land affect the value of others nearby. Real estate can be used for many things to generate income, such as running a business or renting to someone else.
Isn't real estate's price increase only driven by other people's demand
Yes, that's what makes it productive. Productive assets, in general, have prices that are largely based on their ability to produce income. If you are putting money into real estate hoping to make money from price increases, you aren't treating real estate as a productive asset, but instead as a speculative asset. If you aren't expecting to make money from price increases, but are instead expecting to make money from rent or other value produced, then you are treating it as a productive asset.
I fail to see how real estate produce periodic profit like farms or business.
I fail to see how you could fail to see that. Real estate generally produces rent. It can also produce income from economic activity taking place on it. A farm is itself partially real estate; you can't have a farm without land.
Simplified calcualtion: If you buy a flat for $100k and rent it out for $500/Month:
$500*12 / $100,000 = 6% ROI
Try that with Gold ....
You have an idea to manufacture and sell widgets. At first, you and your partner, let's call him Woz, make widgets in the garage at your home. Eventually, the demand for your widgets grows and you need more space for widget making machines, raw materials and new employees. You find and rent a small building in a nearby industrial park. The owner of the land collects rent from his productive asset.
Eventually, you need even more space and, after making a cost-benefit analysis, decide that it is more efficient to buy your own land and build your own building. It is a wonderful day when the doors open below the sign, "Patrix Widget Company."
In this way, the land, the building, the machinery, the raw materials, the invested capital and the employees are all part of the process to build and sell widgets. Remove the land and building from the equation and there are no widgets produced. Real estate, in this way, is a productive asset.
"Income properties" is an euphemism for base rent-seeking in real estate, yes.
The confusion of land with actual capital is long-standing in economics. See Mason Gaffney's The Corruption of Economics for a detailed review of how this came to be.
House market is one of the commodity futures markets.
People do not understand how much big money they're borrowing and don't know that real estate companies can easily build more houses. Therefore, if you want to sell in the future, basically no one will purchase your old house (need more teenagers to buy).
The price is decided by builders and banks (like the Fed)
If you want to sell higher, these companies will take more advantages than the buyers. Besides, global real estate market value is the highest of all markets, does it still have more potential?
